Going Through Bankruptcy in 2026? Understanding Your Two Tax Return Requirement and What Debts CRA Will (and Won’t) Forgive
Filing for bankruptcy is one of the most stressful financial decisions you can make. If you’re going through bankruptcy in 2026, you need to understand that the Canada Revenue Agency (CRA) has special rules that apply to you—including a requirement to file two separate tax returns for the year you declare bankruptcy. This bankruptcy tax requirement catches many Canadians off guard, but knowing what to expect can help you avoid costly mistakes and ensure you meet all your obligations.
In this guide, we’ll walk you through everything you need to know about filing taxes during bankruptcy, which tax debts CRA will forgive, and which ones will follow you even after your discharge.
Why Do You Need to File Two Tax Returns During Bankruptcy?
When you declare bankruptcy in Canada, the CRA treats it as a significant financial event that splits your tax year into two distinct periods. This means you must file two separate tax returns for the year you go bankrupt.
Here’s how it works:
- Pre-bankruptcy return: This covers the period from January 1st up to the day before you filed for bankruptcy. For example, if you declared bankruptcy on June 15, 2026, your pre-bankruptcy return would cover January 1 to June 14, 2026.
- Post-bankruptcy return: This covers the period from the date of your bankruptcy to December 31st of that year. Using the same example, this return would cover June 15 to December 31, 2026.
Both returns are due by April 30, 2027 (or June 15, 2027 if you or your spouse are self-employed). Your bankruptcy trustee is responsible for filing the pre-bankruptcy return, while you are responsible for filing the post-bankruptcy return.
What Makes These Returns Different?
These aren’t just regular tax returns split in half. The pre-bankruptcy return has special rules about what income, deductions, and credits you can claim. Your trustee will need to report all income you earned before bankruptcy and identify which assets and debts belong to the bankruptcy estate.
The post-bankruptcy return is filed like a normal return, but you can only claim deductions and credits for the period after your bankruptcy date. This can significantly affect credits like the Canada Child Benefit, GST/HST credit, and various provincial benefits.
Which Tax Debts Will CRA Forgive in Bankruptcy?
One of the biggest questions people have during bankruptcy is: “Will my tax debt be wiped out?” The answer depends on what type of tax debt you owe.
Generally, most personal income tax debts are considered unsecured debts and can be discharged through bankruptcy. This includes:
- Income tax owing: Any personal income tax you owe from previous years
- Interest and penalties: Interest charges and late-filing penalties on your tax debt
- GST/HST owing: If you’re self-employed and owe GST/HST as part of your personal tax obligations
- Overpayments of benefits: If you received too much in Canada Child Benefit, GST/HST credit, or other benefits and have to pay them back
When these debts are discharged, CRA cannot pursue you for payment after your bankruptcy is complete. This can provide significant relief if you’re carrying thousands of dollars in back taxes.
Important Timing Note
Only tax debts that existed before your bankruptcy date can be included. Any new tax debt that arises from your post-bankruptcy return or future tax years is your responsibility to pay—it won’t be covered by the bankruptcy.
Which Tax Debts Will CRA NOT Forgive?
Not all tax-related debts disappear in bankruptcy. There are several important exceptions you need to know about:
- Payroll source deductions: If you’re a business owner or employer who failed to remit employee CPP, EI, or income tax deductions, these are considered trust funds. CRA views this money as belonging to your employees and the government, not you. These debts survive bankruptcy and you’ll still owe them after discharge.
- GST/HST collected but not remitted: If you collected GST/HST from customers but didn’t send it to CRA, this is also considered a trust debt. You held this money in trust for the government, so it cannot be discharged in bankruptcy.
- Student loans: Federal and provincial student loans cannot be discharged in bankruptcy unless at least seven years have passed since you stopped being a student (either full-time or part-time). If you declared bankruptcy in 2026 but only graduated in 2021, you’ll still owe your student loans.
- Court fines and penalties: Any fines or penalties imposed by a court, including tax evasion penalties, cannot be discharged.
- Director liability: If you were a director of a corporation, you can be personally liable for the company’s unremitted payroll deductions and GST/HST. This personal liability survives your bankruptcy.
These exceptions can be financially devastating if you’re not prepared. Many people file for bankruptcy thinking all their CRA debt will disappear, only to discover they still owe tens of thousands in trust fund liabilities.
How Bankruptcy Affects Your Tax Refunds and Benefits
Another important aspect of bankruptcy and taxes involves what happens to any refunds or credits you’re entitled to.
Pre-Bankruptcy Tax Refunds
Any tax refund from your pre-bankruptcy return belongs to your bankruptcy estate, not to you. Your trustee will claim this refund and it will be distributed to your creditors. This applies to refunds from the bankruptcy year as well as previous years if you haven’t filed those returns yet.
Post-Bankruptcy Tax Refunds
Refunds from your post-bankruptcy return generally belong to you, not the bankruptcy estate. However, your trustee may have rights to a portion depending on your specific bankruptcy agreement.
Government Benefits During Bankruptcy
Benefits like the Canada Child Benefit (CCB), GST/HST credit, and provincial credits will be recalculated based on your two separate returns. Because your income is split across two returns, you might actually receive higher benefit payments during the bankruptcy year—or lower payments if your income was concentrated in the pre-bankruptcy period.
CRA will automatically adjust your benefit amounts once both returns are filed and assessed.
Common Mistakes Canadians Make with Bankruptcy Tax Returns
Navigating the bankruptcy tax requirement is complicated, and many people make costly errors:
- Not filing on time: Missing the deadline for either return can result in penalties and interest, and may even affect your bankruptcy discharge
- Claiming credits incorrectly: Splitting credits like medical expenses, donations, and RRSP contributions between the two returns requires careful calculation
- Assuming all CRA debt is gone: Not realizing that trust debts survive bankruptcy can leave you facing collection action after discharge
- Filing only one return: Some people don’t realize they need two separate returns and only file one, causing CRA assessment problems
- Not coordinating with the trustee: Your trustee files the pre-bankruptcy return, but poor communication can lead to errors or missed deductions
What Happens If You Don’t File Your Bankruptcy Tax Returns?
Failing to file your required tax returns during bankruptcy has serious consequences. Your bankruptcy trustee cannot recommend your discharge to the court if you haven’t filed all required returns. This means your bankruptcy process will be delayed, costing you more money in trustee fees and leaving you in financial limbo.
CRA can also oppose your discharge if you have unfiled returns or significant non-dischargeable tax debt. This could result in conditional discharge (where you have to pay a portion of the debt) or even refusal of discharge in extreme cases.
Filing Taxes for Previous Years During Bankruptcy
Many people who file for bankruptcy haven’t filed tax returns for several years. You are required to file all outstanding returns as part of your bankruptcy obligations.
Your trustee will help you identify which years you need to file. Any refunds from those prior years become property of the bankruptcy estate, while any additional tax owing becomes part of your dischargeable debt (unless it falls into one of the non-dischargeable categories).
Getting caught up on unfiled returns can actually work in your favour—you might discover refunds you didn’t know about, or at least get accurate numbers on what you actually owe rather than CRA estimates.
How to Handle Your 2026 Bankruptcy Tax Obligations
If you’re going through bankruptcy in 2026, here are the practical steps you need to take:
- Communicate with your trustee: Make sure you understand who is filing which return and what documentation they need from you
- Keep detailed records: Separate your income records, receipts, and tax slips by the bankruptcy date
- Understand what debt remains: Get clarity on whether any of your CRA debt is non-dischargeable before assuming it will all disappear
- File both returns on time: Missing deadlines can jeopardize your discharge and result in penalties
- Don’t attempt this alone: The bankruptcy tax requirement is one of the most complex areas of Canadian tax law
Why Professional Help Is Essential for Bankruptcy Tax Returns
Filing two tax returns during bankruptcy involves splitting income, deductions, and credits across two periods using special CRA rules. One mistake can delay your discharge, cost you thousands in lost benefits, or leave you owing debt you thought was forgiven.
While your bankruptcy trustee handles the pre-bankruptcy return, they may not provide detailed tax planning or optimization. And you’re still responsible for your post-bankruptcy return, which requires understanding how the bankruptcy affects your credits and deductions.
Working with experienced tax professionals who understand Canadian bankruptcy rules ensures both returns are filed correctly, on time, and in a way that maximizes any refunds or credits you’re entitled to while minimizing your ongoing tax obligations.
At JHG Corporate and Tax Services Inc., we have extensive experience helping Canadians navigate the bankruptcy tax requirement. We work directly with bankruptcy trustees to ensure seamless filing of both returns, and we help you understand exactly which debts will be forgiven and which will remain. Our team stays current on all CRA bankruptcy rules and can guide you through this challenging time with clarity and confidence.
Don’t let confusion about the bankruptcy tax requirement delay your financial fresh start. Contact JHG Corporate and Tax Services Inc. today to ensure your 2026 bankruptcy tax returns are handled properly.
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Frequently Asked Questions
Do I need to file two tax returns if I go bankrupt in 2026?
Yes, the bankruptcy tax requirement means you must file two separate tax returns for the year you declare bankruptcy. Your trustee files a pre-bankruptcy return covering January 1 to the day before bankruptcy, and you file a post-bankruptcy return covering the bankruptcy date to December 31. Both are due by the normal tax deadline.
Will CRA forgive my tax debt if I file for bankruptcy?
Most personal income tax debts, including back taxes, interest, and penalties, can be discharged in bankruptcy. However, payroll source deductions, unremitted GST/HST collected from customers, and certain penalties are considered trust debts and cannot be forgiven. These survive bankruptcy and you’ll still owe them after discharge.
What happens to my tax refund during the bankruptcy tax requirement process?
Any tax refund from your pre-bankruptcy return belongs to your bankruptcy estate and will be distributed to your creditors by your trustee. Refunds from your post-bankruptcy return generally belong to you, though your trustee may have rights to a portion depending on your bankruptcy agreement.
Can I file my own bankruptcy tax returns or do I need professional help?
While your bankruptcy trustee files the pre-bankruptcy return, the complexity of splitting income, deductions, and credits across two returns makes professional tax help essential. Errors can delay your bankruptcy discharge, cost you thousands in lost benefits, or leave you owing debt you thought was forgiven.
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Cited Sources:
- CRA – Bankruptcy and Insolvency
- CRA – Filing Income Tax Returns When Bankrupt
- CRA – Trust Accounts and Source Deductions
When it comes to taxes, they are always changing, always being updated!
That is why it is always recommended to use a professional like JHG Corporate and Tax Services Inc to get your taxes done to ensure you are getting the most out of your tax return.
Click here to book an appointment with a real tax pro now!
Or Call Our Hotline Today: 778-691-5566
